Societal CDMO 10Q 2022 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2022

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-36329

Societal CDMO, Inc.

(Exact name of registrant as specified in its charter)


Pennsylvania	26-1523233
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1 E. Uwchlan Ave, Suite 112, Exton, Pennsylvania	19341
(Address of principal executive offices)	(Zip Code)

(770) 534-8239

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol	Name of exchange on which registered
Common Stock, par value $0.01	SCTL	The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 3, 2022, there were 56,657,860 shares of common stock, par value $0.01 per share, outstanding.

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION		1
Item 1. Financial statements	��	1
Item 2. Management's discussion and analysis of financial condition and results of operations		18
Item 3. Quantitative and qualitative disclosures about market risk		26
Item 4. Controls and procedures		26
PART II. OTHER INFORMATION		27
Item 1. Legal proceedings		27
Item 1A. Risk factors		27
Item 2. Unregistered sales of equity securities and use of proceeds		28
Item 3. Defaults upon senior securities		28
Item 4. Mine safety disclosures		28
Item 5. Other information		28
Item 6. Exhibits		28
SIGNATURES		30

PART I. FINANCIAL INFORMATION

Item 1. Financial statements

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)


(amounts in thousands, except share and per share data)	June 30, 2022			December 31, 2021
Assets
Current assets:
Cash and cash equivalents	$	15,481		$	25,217
Accounts receivable, net		16,524			11,913
Contract asset		9,359			8,565
Inventory		8,366			8,917
Prepaid expenses and other current assets		2,245			2,917
Total current assets		51,975			57,529
Property, plant and equipment, net		50,957			51,708
Operating lease asset		5,712			5,924
Intangible assets, net		3,392			3,833
Goodwill		41,077			41,077
Other assets		246			246
Total assets	$	153,359		$	160,317
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	2,336		$	2,085
Current portion of related party debt		2,039			2,039
Current portion of operating lease liability		1,069			1,055
Accrued expenses and other current liabilities		7,784			12,556
Total current liabilities		13,228			17,735
Debt, net of current portion		94,360			92,127
Related party debt, net of current portion		3,586			3,369
Operating lease liability, net of current portion		4,769			4,932
Other liabilities		87			90
Total liabilities		116,030			118,253
Commitments and contingencies (note 7)
Shareholders’ equity:
Preferred stock, $0.01 par value. 10,000,000 shares authorized, NaN issued or outstanding		0			0
Common stock, $0.01 par value. 95,000,000 shares authorized, 56,644,563 and 46,681,453 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively		566			467
Additional paid-in capital		289,900			287,351
Accumulated deficit		(253,137	)		(245,754	)
Total shareholders’ equity		37,329			42,064
Total liabilities and shareholders’ equity	$	153,359		$	160,317

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
(amounts in thousands, except share and per share data)	2022			2021			2022			2021
Revenue	$	23,152		$	18,017		$	44,346		$	34,820
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		17,470			12,334			33,584			26,671
Selling, general and administrative		5,160			3,787			10,870			8,470
Amortization of intangible assets		220			54			441			700
Total operating expenses		22,850			16,175			44,895			35,841
Operating income (loss)		302			1,842			(549	)		(1,021	)
Interest expense		(3,421	)		(3,960	)		(6,834	)		(7,858	)
Gain on extinguishment of debt		—			3,352			—			3,352
Net (loss) income	$	(3,119	)	$	1,234		$	(7,383	)	$	(5,527	)

(Loss) income per share, basic and diluted	$	(0.06	)	$	0.03		$	(0.13	)	$	(0.16	)

Weighted average shares outstanding
Basic		56,598,706			39,018,730			56,475,626			34,403,935
Diluted		56,598,706			39,352,054			56,475,626			34,403,935

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity or Deficit

(Unaudited)


	Common stock				Additional paid-in			Accumulated
(amounts in thousands, except share data)	Shares		Amount		capital			deficit			Total
Balance, December 31, 2021		46,681,453	$	467	$	287,351		$	(245,754	)	$	42,064
Issuance of common stock, net of costs		9,302,718		93		(109	)		—			(16	)
Stock-based compensation expense		—		—		1,479			—			1,479
Vesting of restricted stock units, net		487,695		5		(106	)		—			(101	)
Exercise of stock options		220		—		—			—			—
Net loss		—		—		—			(4,264	)		(4,264	)
Balance, March 31, 2022		56,472,086	$	565	$	288,615		$	(250,018	)	$	39,162
Issuance of common stock, net of costs		—		—		(113	)		—			(113	)
Stock-based compensation expense		—		—		1,408			—			1,408
Vesting of restricted stock units, net		172,477		1		(10	)		—			(9	)
Net loss		—		—		—			(3,119	)		(3,119	)
Balance, June 30, 2022		56,644,563	$	566	$	289,900		$	(253,137	)	$	37,329

Balance, December 31, 2020		28,601,358	$	286	$	219,998		$	(234,384	)	$	(14,100	)
Issuance of common stock, net of costs		2,202,420		22		9,318			—			9,340
Stock-based compensation expense		—		—		3,133			—			3,133
Vesting of restricted stock units, net		209,541		2		(338	)		—			(336	)
Net loss		—		—		—			(6,761	)		(6,761	)
Balance, March 31, 2021		31,013,319	$	310	$	232,111		$	(241,145	)	$	(8,724	)
Issuance of common stock, net of costs		15,333,332		153		31,950			—			32,103
Stock-based compensation expense		—		—		1,929			—			1,929
Vesting of restricted stock units, net		155,198		2		(128	)		—			(126	)
Net income		—		—		—			1,234			1,234
Balance, June 30, 2021		46,501,849	$	465	$	265,862		$	(239,911	)	$	26,416

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended June 30,
(amounts in thousands)	2022			2021
Cash flows from operating activities:
Net loss	$	(7,383	)	$	(5,527	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Stock-based compensation expense		2,887			5,062
Non-cash interest expense		2,530			3,080
Depreciation expense		3,594			3,033
Amortization of intangible assets		441			700
Gain on extinguishment of debt		0			(3,352	)
Changes in operating assets and liabilities:
Accounts receivable		(4,611	)		(3,780	)
Contract asset		(794	)		(20	)
Inventory		551			3,734
Prepaid expenses and other assets		884			426
Accrued interest		(2,182	)		36
Accrued payroll		(2,227	)		69
Accounts payable, accrued expenses and other liabilities		199			(726	)
Net cash (used in) provided by operating activities		(6,111	)		2,735
Cash flows from investing activities:
Purchases of property and equipment		(3,306	)		(2,112	)
Net cash used in investing activities		(3,306	)		(2,112	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of costs		(129	)		32,103
Cash portion of $16,160 reduction to debt principal and accrued exit fee		0			(10,100	)
Payment of financing costs		(80	)		(200	)
Net payments related to vesting of restricted stock units		(110	)		(462	)
Net cash (used in) provided by financing activities		(319	)		21,341
Net (decrease) increase in cash and cash equivalents		(9,736	)		21,964
Cash and cash equivalents, beginning of period		25,217			23,760
Cash and cash equivalents, end of period	$	15,481		$	45,724
Supplemental disclosures of cash flow information:
Cash paid for interest	$	7,015		$	4,833
Purchases of property, plant and equipment included in accrued expenses and accounts payable		582			191
Issuance of common stock to reduce debt principal and accrued exit fees		0			6,060
Issuance of common stock to settle interest obligations		0			3,211

See accompanying notes to consolidated financial statements.

SOCIETAL CDMO, INC. AND SUBSIDIARIES

Notes to consolidated financial statements

(amounts in thousands, except share and per share data)

(Unaudited)

(1) Background

Societal CDMO, Inc. (the “Company”) was incorporated in the Commonwealth of Pennsylvania on November 15, 2007 as Recro Pharma, Inc. Effective March 21, 2022, Recro Pharma, Inc changed its name to Societal CDMO, Inc. to reflect the corporate transformation that had taken place primarily as a result of its acquisition and successful integration of IriSys, LLC (“IriSys”) into the organization. The Company is a bi-coastal contract development and manufacturing organization with capabilities spanning pre-investigational new drug development to commercial manufacturing and packaging for a wide range of therapeutic dosage forms with a primary focus in the area of small molecules. With an expertise in solving complex manufacturing problems, Societal CDMO provides therapeutic development, end-to-end regulatory support, clinical and commercial manufacturing, aseptic fill/finish, lyophilization, packaging and logistics services to the global pharmaceutical market. The Company has determined that it operates in a single segment.

The Company has incurred net losses since inception and has an accumulated deficit of $253,137 as of June 30, 2022, which is primarily related to the activities of its former research and development business that was spun-out in 2019. The Company’s future operations are highly dependent on the profitability of its development and manufacturing operations. Management believes that it is probable that the Company will be able to meet its obligations as they become due within at least one year after the date financial statements included herein are issued.

(2) Summary of significant accounting principles

Basis of presentation and principles of consolidation

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. In accordance with Securities and Exchange Commission's (“SEC”) rules for interim financial statements, certain information required by U.S. GAAP may be condensed or omitted. The Company’s consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s results for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Use of estimates

The preparation of financial statements and the notes to the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from such estimates.

Business combinations

The Company measures the purchase price paid for acquired companies based on fair value and allocates that purchase price to the assets acquired and liabilities assumed based on their estimated fair values. Valuations are performed to assist in determining the fair values of assets acquired and liabilities assumed, which requires management to make estimates and assumptions, in particular with respect to intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based in part on historical experience and information obtained from the acquired companies and expectations of future cash flows. Costs associated with business combinations are expensed as incurred and classified as selling, general and administrative expenses.

Cash and cash equivalents

Cash and cash equivalents represent cash in banks and highly liquid short-term investments that have maturities of three months or less when acquired. These highly liquid short-term investments are both readily convertible to known amounts of cash and so near to their maturity that they present insignificant risk of changes in value due to changes in interest rates.

Accounts receivable, net

Accounts receivable generally represent amounts billed for services provided under our customer contracts and are recorded at the invoiced amount net of an allowance for credit losses, if necessary. We apply judgment in assessing the ultimate realization of our receivables, and we estimate an allowance for credit losses based on various factors, such as the aging of our receivables, historical experience, and the financial condition of our customers. The allowance for credit losses was not material as of the balance sheet dates presented.

Inventory

Inventory is stated at the lower of cost or net realizable value. Included in inventory are raw materials and work-in-process used in the production of commercial products. Items are issued out of inventory using the first-in, first-out method.

Adjustments to inventory are determined at the raw materials, work-in-process, and finished good levels to reflect obsolescence or impaired balances. Factors influencing inventory obsolescence include changes in demand, product life cycle, product pricing, physical deterioration and quality concerns.

Property, plant and equipment, net

Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are as follows: three to ten years for furniture, office and computer equipment; six to ten years for manufacturing equipment; 40 years for buildings; and the shorter of the lease term or useful life for leasehold improvements. Repairs and maintenance costs are expensed as incurred. The Company reviews the carrying value of property, plant and equipment for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of individual assets or asset groups may not be recoverable.

Goodwill and intangible assets

Goodwill represents the excess of purchase price over the fair value of net assets acquired by the Company in a business combination. Goodwill is not amortized but assessed for impairment on an annual basis or more frequently if impairment indicators exist.

The impairment analysis for goodwill consists of an optional qualitative assessment potentially followed by a quantitative analysis. If the Company determines that the carrying value of its reporting unit exceeds its fair value, an impairment charge is recorded for the excess.

The Company performs its annual goodwill impairment test as of November 30th, or whenever an event or change in circumstance occurs that would require reassessment of the impairment of goodwill. In performing the evaluation, the Company assesses qualitative factors such as overall financial performance, actual and anticipated changes in industry and market conditions, and competitive environments. As a result of the most recent annual goodwill impairment test, the Company determined that there was no impairment of goodwill.

Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company is required to review the carrying value of definite-lived intangible assets for recoverability whenever events occur or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

Contingencies

The Company's business exposes it to various contingencies including compliance with regulations, legal exposures and other matters. Loss contingencies are reflected in the financial statements based on management's assessments of their expected outcome or resolution:

•

They are recognized as liabilities on the balance sheet if the potential loss is probable and the amount can be reasonably estimated.

•

They are disclosed if the potential loss is material and considered at least reasonably possible.

Significant judgment is required to determine probability and whether the amount can be reasonably estimated. Due to uncertainties related to these matters, accruals are based only on the information available at the time. As additional information becomes available, the Company reassesses potential liabilities and may revise previous estimates.

Revenue recognition

The Company generates revenues from manufacturing, packaging, research and development and related services for multiple pharmaceutical companies.

Manufacturing

Manufacturing and other related services revenue is recognized upon transfer of control of a product to a customer, generally upon shipment, based on a transaction price that reflects the consideration the Company expects to be entitled to as specified in the agreement with the commercial partner, which could include variable consideration such as pricing and volume-based adjustments.

Profit-sharing

In addition to manufacturing and packaging revenue, certain customer agreements may have intellectual property sales-based profit-sharing and/or royalties consideration, collectively referred to as profit-sharing, computed on the net product sales of the commercial partner. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based profit-sharing where the license for intellectual property is deemed to be the predominant item to which the profit-sharing relates, the Company recognizes revenue when the related sales occur by the commercial partner. For arrangements that include sales-based profit-sharing where the license for intellectual property is not deemed to be the predominant item to which the profit-sharing relates, the Company recognizes revenue upon transfer of control of the manufactured product. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by the Company’s commercial partners, which are outside of the Company’s control. Factors causing price adjustments by the Company’s commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.

Research and development

Research and development revenue includes services associated with formulation, process development, clinical trials materials services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.

In contracts that specify milestones, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which the Company has continuing performance obligations are deferred and recognized over the period of performance. Milestone payments that are not within the Company’s control, such as submission for approval to regulators by a commercial partner or approvals from regulators, are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received.

In contracts that require revenue recognition over time, the Company utilizes input or output methods, depending on the specifics of the contract, that compare the cumulative work-in-process to date to the most current estimates for the entire performance obligation. Under these contracts, the customer typically owns the product details and process, which have no alternative use. These projects are customized to each customer to meet its specifications and typically only one performance obligation is included. Each project represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created or enhanced by the Company’s services and can make changes to its process or specifications upon request.

Contract assets represent revenue recognized for performance obligations completed or in process before an unconditional right to payment exists, and therefore invoicing or associated reporting from the customer regarding the computation of the net product sales has not yet occurred. Contract liabilities represent payments received from customers prior to the completion of associated performance obligations.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents and accounts receivable. The Company manages its cash and cash equivalents based on established guidelines relative to diversification and maturities to maintain safety and liquidity.

The Company’s accounts receivable balances are primarily concentrated among 3 customers. If any of these customers’ receivable balances should be deemed uncollectible, it could have a material adverse effect on the Company’s results of operations and financial condition.

The Company is dependent on its relationships with a small number of commercial partners. The Company's 3 largest customers generated 76% and 72% of its revenues for the three and six months ended June 30, 2022, respectively.

Stock-based compensation expense

The Company measures employee stock-based awards at grant-date fair value and recognizes employee compensation expense on a straight-line basis over the vesting period of the award. The Company accounts for forfeitures as they occur.

Determining the appropriate fair value of stock options requires the use of subjective assumptions, including the expected life of the option and expected stock price volatility. The Company uses the Black-Scholes option pricing model to value its stock option awards. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and/or management uses different assumptions, stock-based compensation expense could be materially different for future awards.

The expected life of stock options was estimated using the “simplified method,” which is based on the average of the vesting tranches and the contractual life of each grant. For stock price volatility, the Company uses the historical volatility of its publicly traded stock in order to estimate future stock price trends. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.

Upon exercise of stock options or vesting of restricted stock units, the holder may elect to cover tax withholdings by forfeiting shares of an equivalent value. In such cases, the Company issues net new shares to the holder, pays the tax withholding on behalf of the participant and presents the payment similar to a capital distribution: a reduction to additional paid-in-capital and a financing cash outflow in the consolidated financial statements.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized. A full valuation allowance was recorded as of June 30, 2022 and December 31, 2021.

Unrecognized income tax benefits represent income tax positions taken on income tax returns that have not been recognized in the consolidated financial statements. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50%) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company does not anticipate significant changes in the amount of unrecognized income tax benefits over the next year.

Leases

The Company determines if an arrangement is a lease at inception. The arrangement is a lease if it conveys the right to the Company to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Options to extend the lease are included in the lease term if the options are reasonably certain to be exercised. Operating lease expense is recognized on a straight-line basis over the lease term.

Operating lease balances are presented as separate captions on the balance sheets. Finance lease assets are included in property, plant and equipment. Finance lease liabilities are included in debt.

Income or loss per share

Basic income or loss per share is determined by dividing net income or loss (the numerator) by the weighted average common shares outstanding during the period (the denominator).

To calculate diluted income or loss per share, the numerator and denominator are adjusted to eliminate the income or loss and the dilutive effects on shares, respectively, caused by outstanding common stock options, warrants and unvested restricted stock units, using the treasury stock method, if the inclusion of such instruments would be dilutive.

For the three months ended June 30, 2021, the Company reported net income. The calculation of net income used to determine basic and diluted per share results in the period ended June 30, 2021, is consistent with how net income is calculated in the period ended June 30, 2022, however, the calculation of weighted average shares outstanding used to determine basic and diluted per share results differs. The following table reconciles that difference for the period ended June 30, 2021:


Weighted average shares outstanding, basic		39,018,730
Dilutive impact of:
Restricted stock units		218,253
Stock options		4,024
Warrants		111,047
Weighted average shares outstanding, diluted		39,352,054

For all other periods presented, the Company incurred a net loss. In periods of net loss, the inclusion of dilutive securities would be antidilutive because it would reduce the amount of loss incurred per share. As a result, no additional dilutive shares were included in diluted loss per share, and there were no differences between basic and diluted loss per share.

The following table presents the potentially dilutive securities that were excluded from the computations of diluted loss per share:


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Restricted stock units		1,576,166		540,942		1,514,461		456,344
Stock options		8,279,256		4,465,348		7,383,008		4,337,299
Warrants		348,664		348,664		348,664		348,664

Amounts in the table above reflect the common stock equivalents of the noted instruments.

Recent accounting pronouncements

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). This ASU provides temporary optional expedients and exceptions to the guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. In January 2021, the FASB issued ASU 2021-01, which refines the scope of Topic 848 and clarifies some of its guidance as part of the FASB’s monitoring of global reference rate activities. The new guidance was effective upon issuance, and the Company is allowed to elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the impact this standard will have on its consolidated financial statements.

(3) Inventory

The following table presents the components of inventory:


	June 30, 2022		December 31, 2021
Raw materials	$	4,004	$	3,038
Work in process		1,057		3,363
Finished goods		3,305		2,516
Inventory	$	8,366	$	8,917

(4) Property, plant and equipment, net

The following table presents the components of property, plant and equipment:


	June 30, 2022			December 31, 2021
Land	$	3,263		$	3,263
Building and improvements		22,936			22,717
Furniture, office and computer equipment		6,282			6,213
Manufacturing equipment		51,026			49,687
Construction in progress		8,072			6,856
Property, plant and equipment, gross		91,579			88,736
Less: accumulated depreciation		(40,622	)		(37,028	)
Property, plant and equipment, net	$	50,957		$	51,708

Interest expense capitalized to construction in progress was $294 and $65 for the three months ended June 30, 2022 and 2021, respectively, and $563 and $65 for the six months ended June 30, 2022 and 2021, respectively.

(5) Intangible assets, net

The following table presents the components of other intangible assets:


	June 30, 2022						December 31, 2021
	Gross value		Accumulated amortization		Carrying value		Gross value		Accumulated amortization		Carrying value
Customer relationships	$	18,900	$	15,928	$	2,972	$	18,900	$	15,685	$	3,215
Backlog		460		168		292		460		73		387
Trademarks and tradenames		310		182		128		310		79		231
Total	$	19,670	$	16,278	$	3,392	$	19,670	$	15,837	$	3,833

The following table presents estimated future amortization of other intangible assets:


Twelve months ending June 30,
2023	$	804
2024		588
2025		486
2026		486
2027		486
Thereafter		542
Total	$	3,392

(6) Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:


	June 30, 2022		December 31, 2021
Payroll and related costs	$	3,490	$	5,717
Current portion of contract liabilities (see note 10)		2,216		2,308
Property, plant and equipment		375		663
Professional and consulting fees		476		552
Accrued interest		323		2,505
Other		904		811
Total	$	7,784	$	12,556

(7) Commitments and contingencies

Litigation

The Company is involved, from time to time, in various claims and legal proceedings arising in the ordinary course of its business. Except as disclosed below, the Company is not currently a party to any such claims or proceedings that, if decided adversely to it, would either individually or in the aggregate have a material adverse effect on its business, financial condition or results of operations.

On May 31, 2018, a securities class action lawsuit (the “Securities Litigation”) was filed against the Company and certain of its officers and directors (collectively, the “Defendants”) in the U.S. District Court for the Eastern District of Pennsylvania (the “Court”) (Case No. 2:18-cv-02279-MMB) that purported to state a claim for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder, based on statements made by the Company concerning the New Drug Application (“NDA”) for IV meloxicam. The complaint seeks unspecified damages, interest, attorneys’ fees and other costs. On December 10, 2018, the lead plaintiff filed an amended complaint that asserted the same claims and sought the same relief but included new allegations and named additional officers as defendants. On February 8, 2019, the Company filed a motion to dismiss the amended complaint in its entirety, which the lead plaintiff opposed on April 9, 2019. On May 9, 2019, the Company filed its response and briefing was completed on the motion to dismiss. In response to questions from the Court, the parties submitted supplemental briefs regarding the motion to dismiss the amended complaint during the fall of 2019. On February 18, 2020, the motion to dismiss was granted by the Court without prejudice. On April 25, 2020, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the second amended complaint on June 18, 2020. The plaintiff filed an opposition to the Company’s motion to dismiss on August 17, 2020. On September 16, 2020, the Company filed a reply in support of its motion to dismiss. On March 1, 2021, the Court denied the Company’s second motion to dismiss. On June 21, 2021, the Defendants filed an answer and affirmative defenses to the second amended complaint. Since then, the parties have been engaged in discovery, which must conclude by April 29, 2022. On September 30, 2021, the plaintiff filed a motion for class certification and appointment of class representative. The Company filed an opposition to the plaintiff’s motion on November 30, 2021. On January 6, 2022, the plaintiff filed a reply in support of the motion for class certification. On March 24, 2022, the plaintiff informed the Court that the parties had reached an agreement-in-principle to settle the Securities Litigation and requested that the Court stay all deadlines. On May 10, 2022, the plaintiff filed an unopposed motion for preliminary approval of the class action settlement. The Court entered an order preliminarily approving the settlement and providing for notice on May 12, 2022. A hearing for the final approval of the settlement is set for October 26, 2022.

In connection with the separation of the Company's former acute care research and development business into a new standalone entity named Baudax Bio, Inc. (“Baudax Bio”), Baudax Bio accepted assignment by the Company of all of its obligations in connection with the Securities Litigation and agreed to indemnify it for all liabilities related to the Securities Litigation.

On July 2, 2022, a product liability lawsuit was filed against the Company and various other defendants in the State Court of Cobb County, Georgia that claimed injuries and damages caused by Plaintiff Jakob Cuble’s alleged ingestion of, inter alia, Focalin XR. The complaint seeks compensatory and punitive damages. On July 7, 2022, and prior to the Company’s being served with the complaint, a co-defendant removed the matter to the United States District Court for the Northern District of Georgia, Atlanta Division. The Company filed its responsive pleading on August 2, 2022.

Purchase commitments

As of June 30, 2022, the Company had outstanding cancelable and non-cancelable purchase commitments in the aggregate amount of $10,580 related to inventory, capital expenditures and other goods and services.

Employment agreements and certain other contingencies

The Company has entered into employment agreements with each of its named executive officers that provide for, among other things, severance commitments of up to $1,303 should the Company terminate the named executive officers for convenience or if certain events occur following a change in control. In addition, the Company is subject to other contingencies of up to $3,772 in the aggregate if certain events occur following a change in control.

(8) Debt

The following table presents the components and classification of debt:


	June 30, 2022			December 31, 2021
Debt principal:
Terms loans under Credit Agreement	$	100,000		$	100,000
Note with former equity holder of IriSys		6,117			6,117
Other		339			339
Debt principal		106,456			106,456
Debt adjustments:
Unamortized deferred issuance costs		(6,770	)		(8,896	)
Exit fee accretion		751			669
Unamortized original discount		(452	)		(694	)
Carrying value of debt	$	99,985		$	97,535

Current portion of related party debt	$	2,039		$	2,039
Debt, net of current portion		94,360			92,127
Related party debt, net of current portion		3,586			3,369
Carrying value of debt	$	99,985		$	97,535

The following table presents the future maturity of debt principal:


Twelve months ending June 30,
2023	$	2,039
2024		102,041
2025		2,068
2026		35
2027		42
Thereafter		231
Total debt principal	$	106,456

Term loans under Credit Agreement

The Company is currently party to a credit agreement (the “Credit Agreement”) with Athyrium Opportunities III Acquisition LP (“Athyrium”). The Credit Agreement has been fully drawn in the form of $48,000 of term A loans and $52,000 of term B loans, all of which mature on December 31, 2023.

The term loans under the Credit Agreement bear a rate of interest equal to the three-month LIBOR rate, with a 1% floor, plus 8.25% per annum. The term loans require the Company to pay a 1% exit fee on all repayments. At June 30, 2022, the aggregate exit fee payable was $1,000, and the cumulative exit fee accreted was $751. The exit fees are being accreted to the carrying amount of the debt using the effective interest method over the term of the loan. In addition, if the Company makes any prepayments prior to maturity, the Company would be subject to prepayment premiums on the term B loans, as a percentage of the amount repaid, of 2.5%.

The Credit Agreement contains certain usual and customary affirmative and negative covenants, as well as financial covenants that the Company will need to satisfy on a monthly and quarterly basis, including maintaining a permitted net leverage ratio (which is the Company’s indebtedness under the Credit Agreement, net of cash and cash equivalents, divided by EBITDA, each as defined in the Credit Agreement) and liquidity amount. As of June 30, 2022, the Company was in compliance with its covenants under the Credit Agreement.

In connection with the Credit Agreement, the Company issued warrants to each of Athyrium and its affiliate, Athyrium Opportunities II Acquisition LP (“Athyrium II”), to purchase an aggregate of 348,664 shares of the Company’s common stock with an exercise price of $1.73 per share. See note 9 for additional information. The warrants are exercisable through November 17, 2024.

In connection with the Credit Agreement and amendments made to it over the years, the Company has paid financing costs, has incurred costs to record and subsequently to adjust the value of the warrants described above and has been accreting the exit fee described above. These costs are being recognized in interest expense using the effective interest method over the term of the Credit Agreement, resulting in non-cash interest expense of $1,151 and $1,618 for the three months ended June 30, 2022 and 2021, respectively, and $2,288 and $3,080 for the six months ended June 30, 2022 and 2021, respectively.

At June 30, 2022, the overall effective interest rate, including cash paid for interest and non-cash interest expense, was 13.8%.

Note with former equity holder of IriSys

In connection with the acquisition of IriSys, the Company issued a subordinated promissory note to a former equity holder of IriSys in the aggregate principal amount of $6,117 (the “Note”). The Note is unsecured, has a three-year term, and bears interest at a rate of 6% per annum. The Note must be repaid in three equal annual installments through its maturity date, August 13, 2024. The Note may be prepaid in whole or in part at any time prior to the maturity date. The Note is expressly subordinated in right of payment and priority to the term loans under the Credit Agreement with Athyrium.

The Note was initially recognized at fair value as part of the consideration paid for the acquisition of IriSys, resulting in an original discount recognized of $877 that is being recognized as interest expense using the effective interest method over the term of the Note. At June 30, 2022, the overall effective interest rate, including the amortization of the original discount, was 13.0%.

Since the acquisition of IriSys, we believe that the note holder has held a combination of direct beneficial interests and significant influence over at least 10% of the Company's outstanding common stock. As a result, the Company has presented the note holder as a related party. The Company has accrued interest of $323 through June 30, 2022 that will become payable to the former equity holder of IriSys on August 13, 2022.

Other

In connection with the acquisition of IriSys, the Company assumed a loan with a principal amount of $339.

(9) Shareholders’ equity or deficit

Capital raises

The following table presents the Company’s capital raises since its initial public offering in March 2014:


	Date or period	Shares of common stock issued		Gross proceeds		Offering expenses			Net proceeds
Initial public offering	March 12, 2014		4,312,500	$	34,500	$	(4,244	)	$	30,256
Private placement	July 7, 2015		1,379,311		16,000		(1,188	)		14,812
Underwritten public offering	August 19, 2016		1,986,666		14,900		(1,533	)		13,367
Underwritten public offering	December 16, 2016		6,670,000		40,020		(3,132	)		36,888
2018 common stock purchase agreement with Aspire Capital	Year ended December 31, 2018		1,950,000		16,999		—			16,999
2019 common stock purchase agreement with Aspire Capital	Fourth quarter 2020		4,690,972		11,172		(78	)		11,094
Share issuance agreement for amendment 5 to Credit Agreement	February 2021		2,202,420		9,338		(20	)		9,318
Underwritten public offering	May 12, 2021		15,333,332		34,500		(2,397	)		32,103
Issuance of shares for IriSys acquisition	February 2022		9,302,718		20,931		(619	)		20,312

Shares issued

As part of the consideration paid for the acquisition of IriSys, the Company issued 9,302,718 shares of its common stock on February 23, 2022.

Aspire common stock purchase agreement

The Company is currently party to an amended common stock purchase agreement with Aspire Capital Fund LLC (“Aspire Capital”) originally entered into during 2019, and most recently amended in February 2021 (as amended, the “2019 Common Stock Purchase Agreement”). The 2019 Common Stock Purchase Agreement provides that, upon the terms and subject to the conditions and limitations set forth in the agreement, Aspire Capital is committed to purchase, at the Company’s sole election, up to an aggregate value of $41,172 in shares of common stock. As of June 30, 2022, there is availability to issue up to $30,000 or 6,199,299 shares of common stock under the 2019 Common Stock Purchase Agreement.

Warrants

At June 30, 2022, warrants to purchase 348,664 shares of common stock were outstanding. The warrants are held by Athyrium, equity-classified, exercisable at $1.73 per share and expire in November 2024. See note 8 for additional details.

(10) Revenue recognition

The following table presents changes in contract assets and liabilities:


	Contract assets			Contract liabilities
Balance at December 31, 2021	$	8,565		$	2,308
Changes to the beginning balance of contract assets arising from:
Reclassification to receivables as a result of rights to consideration becoming unconditional		(10,518	)		—
Reduction to offset within net contract asset due to recognition of revenue		676			—
Changes in estimate		1,512			—
Contract assets recognized since beginning of period, net of reclassification to receivables and changes in estimates		9,124			—
Changes to contract liabilities:
Amounts billed in advance of contract performance		—			4,275
Revenue recognized		—			(4,367	)
Balance at June 30, 2022	$	9,359		$	2,216

The following table disaggregates revenue by timing of revenue recognition:


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Point in time	$	19,406	$	16,439	$	36,286	$	31,586
Over time		3,746		1,578		8,060		3,234
Total	$	23,152	$	18,017	$	44,346	$	34,820

The Company’s payment terms for manufacturing revenue and development services are typically 30 to 45 days. Profit-sharing revenue is recorded to accounts receivable in the quarter that the product is sold by the commercial partner upon reporting from the commercial partner and payment terms are generally 45 days after quarter end.

(11) Stock-based compensation

In October 2013, the Company established an equity incentive plan that has been subsequently amended and restated to become the 2018 Amended and Restated Equity Incentive Plan (the “A&R Plan”) At June 30, 2022, a total of 226,745 shares were available for future grants under the A&R Plan. On December 1st of each year, pursuant to an “evergreen” provision of the A&R Plan, the number of shares available under the A&R Plan may be increased by the board of directors by an amount equal to 5% of the outstanding common stock on December 1st of that year.

Stock options

Stock options are exercisable generally for a period of 10 years from the date of grant and generally vest over four years.

The following table presents information about the fair value of stock options granted:


	Six months ended June 30,
	2022		2021
Weighted average grant date fair value	$	1.02	$	1.90
Assumptions used to determine fair value:
Range of expected option life	5.5 - 6.0 years		5.5 - 6.0 years
Expected volatility	79 - 81%		79 - 81%
Risk-free interest rate	1.5 - 3.0%		0.7 - 1.2%
Expected dividend yield		0		0

The intrinsic value of options exercised was negligible in the six months ended June 30, 2022, and 0 stock options were exercised in the six months ended June 30, 2021.

The following table presents information about stock option balances and activity:


	Number of shares			Weighted average exercise price		Aggregate intrinsic value		Weighted average remaining contractual life
Balance, December 31, 2021		5,267,567		$	6.47			5.7 years
Granted		3,833,853			1.49
Exercised		(220	)		1.71
Forfeited or expired		(392,414	)		4.61
Balance, June 30, 2022		8,708,786			4.36	$	0	7.2 years
Exercisable		4,087,743			6.96		0	4.3 years

Included in the table above are 1,104,677 options outstanding as of June 30, 2022 that were granted outside the A&R Plan. The grants were made pursuant to the inducement grant exception in accordance with Nasdaq Listing Rule 5635(c)(4).

Restricted stock units

Restricted stock units (“RSUs”) vest over six months to four years depending on the purpose of the award and sometimes include performance conditions in addition to service conditions. The fair value of RSUs on the date of grant is measured as the closing price of the Company's common stock on that date. The weighted average grant-date fair value of RSUs awarded to employees was $1.32 in the six months ended June 30, 2022 and $3.49 in the six months ended June 30, 2021. The fair value of RSUs vested was $719 in the six months ended June 30, 2022 and $1,537 in the six months ended June 30, 2021.

The following table presents information about recent RSU activity:


	Number of shares			Weighted average grant date fair value
Balance, December 31, 2021		990,065		$	3.63
Granted		1,552,590			1.32
Vested		(461,735	)		3.78
Forfeited		(46,133	)		2.65
Balance, June 30, 2022		2,034,787			1.86

Included in the table above are 110,259 time-based RSUs outstanding at June 30, 2022 that were granted outside of the A&R Plan. The grants were made pursuant to the inducement grant exception in accordance with Nasdaq Listing Rule 5635(c)(4).

Other information

The following table presents the classification of stock-based compensation expense:


	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Cost of sales	$	525	$	983	$	916	$	2,375
Selling, general and administrative expenses		883		946		1,971		2,687
Total	$	1,408	$	1,929	$	2,887	$	5,062

As of June 30, 2022, there was $9,721 of unrecognized compensation expense related to unvested options and RSUs that are expected to vest and will be expensed over a weighted average period of 2.5 years.

On June 1, 2022, the Company issued an offer to certain employee optionholders (“Eligible Employees”), subject to specified conditions, to exchange and cancel certain options which met the defined eligibility requirements (“Eligible Options”) for a new RSU grant (“New RSUs”) (collectively known as the “Exchange Offer”). Pursuant to the Exchange Offer, 130 Eligible Employees elected to exchange Eligible Options, and the Company accepted for cancellation Eligible Options to purchase an aggregate of 668,819 shares of common stock, representing approximately 97% of the total shares of common stock underlying the Eligible Options. On July 1, 2022, promptly following the expiration of the Exchange Offer, the Company granted 167,324 New RSUs in exchange for the cancellation of the tendered Eligible Options. The New RSUs will vest in two equal annual installments.

(12) Acquisition of IriSys

On August 13, 2021, the Company acquired all of the units of IriSys pursuant to a unit purchase agreement. IriSys provides contract pharmaceutical product development and manufacturing services, specializing in formulation research and development and good manufacturing practices of clinical trial materials and specialty pharmaceutical products. The acquisition advances the Company’s ongoing growth strategy and leads to key synergies within business development, clinical development and commercial scale-up, as well as a strong cultural alignment and fit between the companies.

The following table presents unaudited supplemental pro forma financial information for the three and six months ended June 30, 2021 as if the IriSys acquisition had occurred on January 1, 2021:


	Three months ended June 30,		Six months ended June 30,
	2021		2021
Revenue	$	21,378	$	41,664
Net income (loss)		586		(5,697	)

The pro forma financial information presented above has been prepared by combining the Company's historical results and the historical results of IriSys and adjusting those results to eliminate historical transaction costs and to reflect the effects of the acquisition as if they occurred on January 1, 2021. The effects of the acquisition on the historical pro forma financial information include additional depreciation and amortization expense from the increase of asset carrying values to fair value, the adoption of new accounting standards, additional interest expense from the issuance of the subordinated promissory note and the elimination of interest expense related to indebtedness of IriSys prior to the acquisition. These results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on the date indicated above, or that may result in the future, and do not reflect potential synergies or additional costs following the acquisition.

(13) Fair value of financial instruments

The Company follows the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” for fair value measurement recognition and disclosure purposes for its financial assets and financial liabilities that are remeasured and reported at fair value each reporting period. The Company measures certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, short-term investments and certain warrants. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy. Categorization is based on a three-tier valuation hierarchy, which prioritizes the inputs used in measuring fair value, as follows:

•

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;

•

Level 2: Inputs that are other than quoted prices in active markets for identical assets and liabilities, inputs that are quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are either directly or indirectly observable; and

•

Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

Items measured at fair value on a recurring basis

Cash equivalents of $10,754 at June 30, 2022 and $15,247 at December 31, 2021 consisted entirely of money market mutual funds whose fair value were determined using Level 1 measurements.

Fair value disclosures

The Company follows the disclosure provisions of FASB ASC Topic 825, “Financial Instruments” (ASC 825), for disclosure purposes for financial assets and financial liabilities that are not measured at fair value. As of June 30, 2022, the financial assets and liabilities recorded on the consolidated balance sheets that are not measured at fair value on a recurring basis include accounts receivable, accounts payable and accrued expenses. The carrying values of these financial assets and liabilities approximate fair value due to their short-term nature.

The fair value of long-term debt, where a quoted market price is not available, is evaluated based on, among other factors, interest rates currently available to the Company for debt with similar terms, remaining payments and considerations of the Company’s creditworthiness. The Company determined that the recorded book value of its debt, a level 2 measurement, approximated fair value at June 30, 2022 due to the recent issuances and amendment of those instruments and taking into consideration management's current evaluation of market conditions.

(14) Leases

The Company is party to 2 operating leases for development facilities in California and Georgia that end in 2031 and 2025, respectively, as well as other immaterial operating leases for office space, storage and office equipment. The development facility leases each include options to extend, none of which are included in the lease terms. Short-term and variable lease costs were not material for the periods presented. The development facility leases do not provide an implicit rate, so the Company uses its incremental borrowing rate to discount the lease liabilities.

Undiscounted future lease payments for the 2 development leases, which were the only material noncancelable leases at June 30, 2022, were as follows:


Twelve months ended June 30,
2023	$	1,151
2024		1,179
2025		1,208
2026		1,094
2027		1,019
Thereafter		4,252
Total lease payments		9,903
Less imputed interest		(4,065	)
Total operating lease liabilities	$	5,838

At June 30, 2022, the weighted average remaining lease term was 8.2 years, and the weighted average discount rate was 14.1%. Total lease cost was $351 and $839 for the three and six months ended June 30, 2022, respectively, and $85 and $186 for the three and six months ended June 30, 2021, respectively.

Item 2. Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report on Form 10-Q, or Quarterly Report, and the audited consolidated financial statements and notes thereto for the year ended December 31, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022, or Annual Report.

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements. Our actual results may differ materially from those discussed below. Please see “Forward-Looking Statements” and “Risk Factors” included in Part I, Item 1A of our Annual Report for factors that could cause or contribute to such differences.

Cautionary note regarding forward-looking statements

This Quarterly Report and the documents incorporated by reference herein contain forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report or the documents incorporated by reference herein regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” “could,” “should,” “potential,” “seek,” “evaluate,” “pursue,” “continue,” “design,” “impact,” “affect,” “forecast,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” “goal,” or the negative of such terms and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Such statements are based on assumptions and expectations that may not be realized and are inherently subject to risks, uncertainties and other factors, many of which cannot be predicted with accuracy and some of which might not even be anticipated.

The forward-looking statements in this Quarterly Report and the documents incorporated herein by reference include, among other things, statements about:

•

our estimates regarding expenses, future revenue, cash flow, capital requirements and timing and availability of and the need for additional financing;

•

our ability to maintain or expand our relationships, profitability and contracts with our key commercial partners, including the impact of changes in consumer demand for the products we manufacture for our commercial partners;

•

our ability to grow and diversify our business with new customers, including our ability to meet desired project outcomes with development customers, and the potential loss of development customers if they do not receive adequate funding or if their products do not obtain FDA approval;

•

the risk that failure to maintain compliance with the continued listing requirements of the Nasdaq Capital Market (“Nasdaq”), may result in receipt of a Nasdaq delisting notice; if upon receipt of a delisting notice, we fail to regain compliance within any allowed grace period or other process provided under the Nasdaq listing requirements, our common stock may be delisted and the value of our common stock may decrease;

•

the extent to which the ongoing COVID-19 pandemic and other diseases continue to disrupt our business operations and the financial condition of our customers and suppliers, including our ability to initiate and continue relationships with manufacturers and third-party logistics providers given recent supply chain challenges;

•

the extent to which inflation, global instability, including political instability, such as a deterioration in the relationship between the US and China or escalation in conflict between Russia and Ukraine, including any additional resulting sanctions, export controls or other restrictive actions that may be imposed by the U.S. and/or other countries against governmental or other entities in, for example, Russia, may disrupt our business operations or our financial condition or the financial condition of our customers and suppliers;

•

our ability to operate under increased leverage and associated lending covenants; to pay existing required interest and principal amortization payments when due; and/or to obtain acceptable refinancing alternatives;

•

the performance of third-party suppliers upon which we depend for Active Pharmaceutical Ingredients, or APIs, various other direct and indirect materials, and other third parties involved with maintenance of our facilities and equipment;

•

our ability to maintain and defend our intellectual property rights against third-parties;

•

pharmaceutical industry market forces that may impact our commercial customers’ success and continued demand for the products we produce for those customers;

•

our ability to recruit or retain key scientific, technical, business development, and management personnel and our executive officers, including as a result of applicable state and federal vaccine mandates;

•

our ability to comply with stringent U.S. and foreign government regulation in the manufacture of pharmaceutical products, including current Good Manufacturing Practice, or cGMP, compliance and U.S. Drug Enforcement Agency, or DEA, compliance and other relevant regulatory authorities applicable to our business; and

•

our ability to realize the expected benefits of the IriSys acquisition.

We may not achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report, particularly under “Item 1A. Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments we may make. You should read this Quarterly Report and the documents that we incorporate by reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements.

Solely for convenience, tradenames referred to in this Quarterly Report appear without the ® symbol, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these tradenames. All trademarks, service marks and tradenames included or incorporated by reference in this Quarterly Report are the property of their respective owners.

Overview

Societal CDMO, Inc. is a bi-coastal contract development and manufacturing organization, or CDMO, with capabilities spanning pre-investigational new drug development to commercial manufacturing and packaging for a wide range of therapeutic dosage forms with a primary focus in the area of small molecules. With an expertise in solving complex formulation and manufacturing problems, we are a leading CDMO providing development, end-to-end regulatory support, clinical and commercial manufacturing, aseptic fill/finish, lyophilization, packaging and logistics services to the global pharmaceutical market. In addition to our experience in handling DEA-controlled substances and developing and manufacturing advanced dosage forms, we have the expertise to deliver on our clients’ pharmaceutical development and manufacturing projects, regardless of complexity level. We do all of this in our best-in-class facilities that, in the aggregate, total 145,000 square feet, in Gainesville, Georgia and San Diego, California.

We currently manufacture the following key products with our key commercial partners: Ritalin LA, Focalin XR, Verelan PM, Verelan SR, Verapamil PM, Verapamil SR, Donnatal liquids and tablets and Scot-Tussin cough and cold liquids, as well as supporting numerous development stage products.

Effective March 21, 2022, we changed our name to Societal CDMO, Inc. to reflect the corporate transformation that has taken place primarily as a result of our acquisition and successful integration of IriSys into the organization.

We use cash flow generated by our business primarily to fund the growth of our CDMO business and to make payments under our credit facility. We believe our business will continue to contribute cash to fund our growth, to make payments under our credit facility and for other general corporate purposes.

Global economic and supply conditions

Global economic conditions, logistics and supply chain issues continue to present obstacles to our business despite having endured other challenges related to the COVID-19 pandemic during 2021.

We rely on third-party manufacturers to supply our manufacturing components, supplies and related materials, which in some instances are supplied from a single source. Prolonged disruptions in the supply of any of our third-party materials, difficulty implementing new sources of supply or significant price increases could have an adverse effect on our results. While the impact of COVID-19 has lessened in many ways, we are experiencing a higher level of residual supply chain disruptions that we are actively managing to meet our second half 2022 production timelines and that may constrain our ability to capture additional growth opportunities, beyond our established projections, from customers who would otherwise want to increase their safety stock of the products that we produce.

We also continue to closely monitor economic developments related to COVID-19 and other diseases and geopolitical conflicts, such as the conflict between Russia and Ukraine, which continue to have adverse effects on the U.S. and global markets.

Due to these and other factors, we anticipate a general slowdown in clinical development activity as a result of clinical failures and/or a lack of adequate funding to go forward, which may cause a reduction in the number of business development opportunities that we will be able to pursue during 2022. We also expect to face continuing inflationary pressures on raw materials, labor and logistics during 2022. Finally, we expect to be impacted by higher interest rates on our LIBOR-based term loan borrowings during the second half of 2022.

Financial overview

Revenues

We recognize three types of revenue: manufacturing, profit-sharing and research and development.

Manufacturing

We recognize manufacturing revenue from the sale of products we manufacture for our commercial partners. Manufacturing revenues are recognized upon transfer of control of a product to a customer, generally upon shipment, based on a transaction price that reflects the consideration we expect to be entitled to as specified in the agreement with the commercial partner, which could include pricing and volume-based adjustments.

Profit-sharing

We recognize profit-sharing or royalty revenue, collectively referred to as profit-sharing revenue, related to the sale of products by our commercial partners that incorporate our technologies. Profit-sharing revenues are generally recognized under the terms of the applicable license, development and/or supply agreement. For arrangements that include sales-based profit-sharing and the license is deemed to be the predominant item to which the profit-sharing relates, we recognize revenue when the related sales occur by the commercial partner. For arrangements that include sales-based profit-sharing and the license is not deemed to be the predominant item to which the profit-sharing relates, we recognize revenue when the performance obligation to which the profit-sharing has been allocated has been satisfied, which is upon transfer of control of a product to a customer. In these cases, significant judgment is required to calculate the estimated variable consideration from such profit-sharing using the expected value method based on historical commercial partner pricing and deductions. Estimated variable consideration is partially constrained due to the uncertainty of price adjustments made by our commercial partners, which are outside of our control. Factors causing price adjustments by our commercial partners include increased competition in the products’ markets, mix of volume between the commercial partners’ customers, and changes in government pricing.

Research and development

Research and development revenue includes services associated with formulation, process development, clinical trial material and clinical trial support services, as well as custom development of manufacturing processes and analytical methods for a customer’s non-clinical, clinical and commercial products. Such revenues are recognized at a point in time or over time depending on the nature and particular facts and circumstances associated with the contract terms.

In contracts that specify milestones, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to be included in the transaction price using the most likely amount method. Milestone payments related to arrangements under which we have continuing performance obligations are deferred and recognized over the period of performance. Milestone payments that are not within our control, such as submission for approval to regulators by a commercial partner or approvals from regulators, are not considered probable of being achieved until those submissions are submitted by the customer or approvals are received.

In contracts that require revenue recognition over time, we utilize input or output methods, depending on the specifics of the contract, that compare the cumulative work-in-process to date to the most current estimates for the entire performance obligation. Under these contracts, the customer typically owns the product details and process, which have no alternative use. These projects are customized to each customer to meet its specifications and typically only one performance obligation is included. Each project represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created or enhanced by our services and can make changes to its process or specifications upon request.

Cost of sales and selling, general and administrative expenses

Cost of sales consists of inventory costs, including production wages, material costs and overhead, and other costs related to the recognition of revenue. Selling, general and administrative expenses consists of salaries and related costs for administrative, public company costs, business development personnel as well as legal, patent-related expenses and consulting fees. Public company costs include compliance, auditing services, tax services, insurance and investor relations.

In October 2021, we integrated and reorganized our collective employee base to support a multi-site organization. As a result, certain employees in administrative roles are supporting the entire company instead of plant operations. Costs associated with these employees, including employee compensation and other expenses, are classified in selling, general and administrative expenses prospectively from October 1, 2021.

Primarily in the last nine months of 2021, we qualified for approximately $4.4 million of federal employee retention credits that were recognized as offsets to expense. We will not recognize any such expense offsets in 2022.

Amortization of intangible assets

Historically, we recognized amortization expense related to an intangible asset for our profit-sharing and contract manufacturing relationships on a straight-line basis over an estimated useful life of six years. Amortization stopped when the intangible asset reached the end of its useful life in April 2021. With the acquisition of IriSys, we are recognizing amortization expense related to acquired customer relationships, backlog and trademarks and trade names on a straight-line basis over estimated useful lives of 7, 2.4, and 1.5 years, respectively.

Interest expense

Interest expense for the periods presented primarily relates to our Athyrium senior secured term loans and the amortization of related financing costs. In addition, following the acquisition of IriSys, there is additional interest expense related to interest on the sellers note which was a component of the IriSys acquisition purchase price.

Net operating losses and tax carryforwards

As of December 31, 2021, we had federal net operating loss, or NOL, carry forwards of approximately $135.9 million, $127.7 million of which have an indefinite carry forward period. The remaining $8.2 million of federal NOL carry forwards, $137.7 million of state NOL carry forwards and federal and state research and development tax credit carryforwards of $4.6 million are also available to offset future taxable income, but they will begin to expire at various dates beginning in 2028 if not utilized. We believe that it is more likely than not that the deferred income tax assets associated with our U.S. operations will not be realized, and as such, there is a full valuation allowance against our U.S. deferred tax assets.

Key indicators of performance

To evaluate our performance, we monitor a number of industry-standard key indicators such as:

•

Safety and human capital management, as measured by recordable injuries, good saves and employee retention;

•

Operational excellence, as measured by the percentage of our orders that are delivered on-time and in full;

•

New business growth, as measured by value of new contracts signed; and

•

Financial operating results, as measured by revenue and EBITDA, as adjusted.

EBITDA, as adjusted, is a non-GAAP measure that we discuss and reconcile to its nearest GAAP measure elsewhere in our public financial reporting. We believe that supplementing our financial results presented in accordance with GAAP with non-GAAP measures is useful to investors, creditors and others in assessing our performance. These measurements should not be considered in isolation or as a substitute for reported GAAP results because they may include or exclude certain items as compared to similar GAAP-based measurements, and such measurements may not be comparable to similarly-titled measurements reported by other companies. Rather, these measurements should be considered as an additional way of viewing aspects of our operations that provide a more complete understanding of our business.

Results of operations

Comparison of second quarters 2022 and 2021


	Three months ended June 30,
(in millions)	2022			2021
Revenue	$	23.2		$	18.0
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		17.5			12.3
Selling, general and administrative		5.2			3.8
Amortization of intangible assets		0.2			0.1
Total operating expenses		22.9			16.2
Operating income		0.3			1.8
Interest expense		(3.4	)		(4.0	)
Gain on extinguishment of debt		—			3.4
Net (loss) income	$	(3.1	)	$	1.2

Revenue. The increase of $5.2 million was primarily driven by an increase in European Ritalin LA demand from our new customer InfectoPharm, revenue resulting from the acquisition of IriSys, as well as higher revenues from our clinical trial materials business. These increases were partially offset by declining revenues from Lannett’s commercial sales of Verapamil PM products compared to the prior year. In an effort to address this decline, we recently executed an amendment to our license and supply agreement with Lannett for the marketing of Verapamil PM and Verelan products subsequent to the end of the period, which provides overall improved economics for Societal and is expected to strengthen revenues from Lannett in the second half of the year despite the declines experienced in the first half of the year.

Cost of sales. The increase of $5.2 million was primarily due to costs associated with operating the San Diego facility acquired from IriSys and increased costs tied to the increased manufacturing revenue during the quarter. In addition, in 2021, we received certain employment incentive tax credits that were not repeated in 2022 resulting in increased expense in 2022. These increases were partially offset by the reallocation of expenses reflecting the post-acquisition organizational structure. Prior to October 1, 2021, these employees supported our plant operations and were classified in cost of sales.

Selling, general and administrative. The increase of $1.4 million was primarily related to increased personnel costs tied to the reallocation of expenses reflecting the post-acquisition organizational structure (see cost of sales above) and integration costs associated with the IriSys integration.

Amortization of intangible assets. The increase of $0.1 million was the result of the amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names partially offset by the amortization of CDMO royalties and contract manufacturing relationships acquired in 2015 ending on April 10, 2021.

Interest expense. The decrease of $0.6 million was primarily due to reduced non-cash financing expense and increased capitalized interest. This decrease was partially offset by an increase in interest from the debt portion of the IriSys acquisition purchase price.

Gain on extinguishment of debt. In June 2021, the promissory note with PNC Bank under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020, or the PPP Note, and all accrued interest thereon was forgiven.

Comparison of six months ended 2022 and 2021


	Six months ended June 30,
(in millions)	2022			2021
Revenue	$	44.3		$	34.8
Operating expenses:
Cost of sales (excluding amortization of intangible assets)		33.6			26.7
Selling, general and administrative		10.9			8.5
Amortization of intangible assets		0.4			0.7
Total operating expenses		44.9			35.9
Operating loss		(0.6	)		(1.1	)
Interest expense		(6.8	)		(7.8	)
Gain on extinguishment of debt		—			3.4
Net loss	$	(7.4	)	$	(5.5	)

Revenue. The increase of $9.5 million was primarily driven by revenue resulting from the acquisition of IriSys as well as higher revenues from our clinical trial materials business. In addition, there was an increase in European Ritalin LA demand from our new customer InfectoPharm as well as an increase in revenue from our largest commercial customer Teva, correlated with pull through in demand resulting from market share gains against the sole competitor for the Verapamil SR products. The increase in revenue was partially offset by a decline in revenue from Lannett’s commercial sales of the Verapamil PM products.

Cost of sales. The increase of $6.9 million was primarily due to the acquisition of the San Diego facility and certain 2021 employment incentive tax credits that were not repeated in 2022 resulting in increased expense in 2022. These increases were partially offset by the reallocation of expenses reflecting the post-acquisition organizational structure. Prior to October 1, 2021, these employees supported our plant operations and were classified in cost of sales.

Selling, general and administrative. The increase of $2.4 million was primarily related to increased personnel costs tied to the reallocation of expenses and integration costs associated with the IriSys integration. These increases were offset by lower stock-based compensation expense.

Amortization of intangible assets. The decrease of $0.3 million was the result of the amortization of CDMO royalties and contract manufacturing relationships acquired in 2015 ending on April 10, 2021 partially offset by the amortization related to the acquisition of IriSys for acquired customer relationships, backlog and trademarks and trade names.

Interest expense. The decrease of $1.0 million was primarily due to reduced non-cash financing expense and increased capitalized interest. Also contributing to the reduction in interest was the successful refinancing and reduced term loan borrowings under the Credit Agreement with Athyrium as well as a decrease in the LIBOR base rate of interest on our term loans under the Credit Agreement. These decreases were partially offset by an increase in interest from the debt portion of the IriSys acquisition purchase price.

Gain on extinguishment of debt. In June 2021, the PPP Note and all accrued interest thereon was forgiven.

Liquidity and capital resources

At June 30, 2022, we had $15.5 million in cash and cash equivalents.

Since our inception, we have financed our operations and capital expenditures primarily from results of operations and the issuance of equity and debt. During the first half of 2022, our capital expenditures were $3.3 million to scale and support our expansion of capabilities.

We are party to a credit agreement with Athyrium, or the Credit Agreement, which has been fully drawn. The Credit Agreement requires us to repay the outstanding principal amount of $100.0 million on December 31, 2023. The Credit Agreement also includes certain financial covenants that the Company will need to satisfy on a monthly and quarterly basis, including: (i) maintaining a permitted net leverage ratio, calculated as our indebtedness, net of cash and cash equivalents, divided by EBITDA, each as defined in the Credit Agreement; and (ii) a minimum amount of cash and cash equivalents on hand.

We are also party to an amended common stock purchase agreement with Aspire Capital Fund LLC, or Aspire Capital. The amended agreement provides that, upon the terms and subject to the conditions and limitations set forth in the agreement, Aspire Capital is committed to purchase, at our sole election, up to an aggregate value of $41.2 million in shares of common stock. As of June 30, 2022, there is availability to issue up to $30.0 million or 6,199,299 shares of common stock under the 2019 Common Stock Purchase Agreement.

We may require additional financing or choose to refinance certain of these instruments, which could include debt refinancing, sale of real estate and/or other assets, strategic development, licensing activities and/or marketing arrangements or through public or private sales of equity or debt securities from time to time. Financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could materially adversely impact our growth plans and our financial condition or results of operations. Further, our ability to access capital market or otherwise raise capital may be adversely impacted by potential worsening global economic conditions, geopolitical conflicts, and the recent disruptions to, and volatility in, financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and the conflict between Russia and Ukraine. Additional debt or equity financing, if available, may be dilutive to the holders of our common stock and may involve significant cash payment obligations and covenants that restrict our ability to operate our business or to access capital.

Sources and uses of cash


	Six months ended June 30,
(amounts in millions)	2022			2021
Net cash (used in) provided by:
Operating activities	$	(6.1	)	$	2.7
Investing activities		(3.3	)		(2.1	)
Financing activities		(0.3	)		21.3
Total	$	(9.7	)	$	21.9

Cash flows from operating activities represents our net loss as adjusted for stock-based compensation, depreciation, non-cash interest expense and amortization of intangibles as well as changes in operating assets and liabilities. The increase in cash used in operations in 2022 compared to 2021 was primarily due to a decrease in stock-based compensation expense in addition to changes in operating assets and liabilities. These included (i) a $3.3 million change in inventory balances due to timing of production and customer orders; (ii) a $1.1 million change in accounts receivable due to increased sales activity; (iii) a $2.3 million change in accrued payroll due to the fact that there were limited cash bonuses paid in 2021 and the effects of payroll period cutoff; and (iv) an additional $2.2 million interest payment that fell in the first quarter of 2022 compared to 2021, partially offset by (v) a $0.5 million reduction of prepaid expenses and other current assets.

Net cash used in investing activities for each period includes capital expenditures to scale and support our expansion of capabilities. With the inclusion of IriSys, we continue to anticipate that 2022 capital expenditures will increase as we continue to maintain our existing capabilities and support the growth of our clinical trials business and other new business acquired from IriSys. We expect to complete a significant capital project during the early second half of 2022 that will enhance our sterile fill and finishing capabilities. If we are unable to complete the capital project according to plan, this could have an adverse impact on our forecasted results.

Net cash provided by financing activities in 2021 changed to net cash used in financing activities in 2022, a change of $21.5 million primarily due to the absence of significant activities that occurred in 2021; in the first half of 2021, net proceeds from an issuance of common stock of $32.1 million were partially offset by debt repayments of $10.1 million and related financing cost payments of $0.2 million.

Forward-looking factors

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:

•

the extent to which we in-license, acquire or invest in products, businesses and technologies;

•

the timing and extent of our manufacturing and capital expenditures;

•

our ability to maintain or expand our relationships and contracts with our commercial partners;

•

our ability to grow and diversify our business with new customers, including our ability to meet desired project outcomes with development customers;

•

our ability to regain profitability;

•

our ability to comply with stringent U.S. & foreign government regulation in the manufacture of pharmaceutical products, including cGMP and U.S. DEA requirements;

•

our ability to raise additional funds through equity or debt financings or sale of real estate or other assets;

•

the costs of maintaining, enforcing and defending intellectual property claims;

•

our ability to regain, and maintain, compliance with the Nasdaq continued listing standards;

•

the extent to which health epidemics and other outbreaks of communicable diseases, including the ongoing COVID-19 pandemic, could disrupt our operations or materially and adversely affect our business and financial conditions; and

•

the extent to which inflation, global instability, including political instability, such as a deterioration in the relationship between the US and China or escalation in conflict between Russia and Ukraine, including any additional resulting sanctions, export controls or other restrictive actions that may be imposed by the U.S. and/or other countries against governmental or other entities in, for example, Russia, may disrupt our business operations or financial condition or the financial condition of our customers and suppliers.

We anticipate raising funds from real estate asset sales to reduce our outstanding debt principal. There are a number of risks and uncertainties that could impact real estate values and or our ability, if any, to successfully monetize the sale of any non-core real-estate assets including, but not limited to, market forces, economic conditions, revenue concentration, debt levels, geographic location, interest rates, results of engineering plans, geotechnical surveys, coverage density, physical characteristics of the land (e.g. rock, wetlands delineation, streams, powerlines, topography, zoning), ability to reach acceptable contractual terms and obtaining the required approvals and release(s) from our senior secured lender.

We may also use existing cash and cash equivalents on hand, additional debt, equity financing, sale of other assets or out-licensing revenue or a combination thereof to fund our operations or acquisitions. If we increase our debt levels, we might be restricted in our ability to raise additional capital and might be subject to financial and restrictive covenants. Our shareholders may experience dilution as a result of the issuance of additional equity or debt securities. This dilution may be significant depending upon the amount of equity or debt securities that we issue and the prices at which we issue any securities.

Contractual commitments

The table below reflects our contractual commitments as of June 30, 2022:


	Payments due by period
(in millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Debt obligations (1):
Principal	$	106.5	$	2.0	$	104.1	$	0.1	$	0.3
Interest		15.0		9.7		5.1		0.1		0.1
Purchase obligations (2)		10.6		0.7		9.9		—		—
Operating leases (3)		9.9		1.2		2.4		2.1		4.2
Other long-term liabilities (4)		—		—		—		—		—
Total	$	142.0	$	13.6	$	121.5	$	2.3	$	4.6

(1)

Debt obligations consist of principal, an exit fee of 1% of that principal, and interest on $100.0 million of outstanding term loans under our credit facility with Athyrium, $6.1 million of notes issued to the former members of IriSys and another small loan. Because the Athyrium term loans bear interest at a variable rate based on LIBOR, we estimated future interest commitments utilizing the LIBOR rate as of June 30, 2022. In accordance with U.S. GAAP, the future interest obligations are not recorded on our consolidated balance sheet.

(2)

Purchase obligations consist of cancelable and non-cancelable purchase commitments related to inventory, capital expenditures and other goods or services. In accordance with U.S. GAAP, these obligations are not recorded on our consolidated balance sheets.

(3)

We are party to two operating leases for development facilities in California and Georgia that end in 2031 and 2025, respectively. The leases each include options to extend at our discretion.

(4)

We have entered into employment agreements with each of our named executive officers that provide for, among other things, severance commitments of up to $1.3 million should we terminate the named executive officers for convenience or if certain events occur following a change in control. In addition, we would be subject to other contingencies of up to $3.8 million in the aggregate if certain events occur following a change in control. Because these obligations are contingent, the amounts are not included in the table above.

Critical accounting policies and estimates

Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report.

Item 3. Quantitative and qualitative disclosures about market risk

There has been no material change in our assessment of our sensitivity to market risk described in the Annual Report.

Item 4. Controls and procedures

Evaluation of disclosure controls and procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of June 30, 2022. We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. However, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal proceedings.

Information regarding legal and regulatory proceedings is set forth in note 7 to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report, and is incorporated by reference herein.

We are also engaged in various other legal actions arising in the ordinary course of our business (such as, for example, proceedings relating to employment matters or the initiation or defense of proceedings relating to intellectual property rights) and, while there can be no assurance, we believe that the ultimate outcome of these other legal actions will not have a material adverse effect on our business, results of operations, financial condition or cash flows.

Item 1A. Risk factors.

Investing in our securities involves certain risks. In addition to any risks and uncertainties described elsewhere in this Quarterly Report, investors should carefully consider the risks and uncertainties discussed in Part I, Item 1A. “Risk Factors” in our Annual Report. These risks are not the only risks that could materialize. Other than as set forth below, there have been no material changes in our risk factors from those previously disclosed in our 2021 Annual Report and Quarterly Report for the quarter ended March 31, 2022.

If we are unable to regain compliance with the listing standards of Nasdaq, our common stock may become delisted, which could have a material adverse effect on the liquidity of our common stock.

The listing standards of the Nasdaq provide that a company, in order to qualify for continued listing, must maintain a minimum closing bid price of $1.00 and satisfy standards relative to minimum shareholders’ equity, minimum market value of publicly held shares and various additional requirements. On June 27, 2022, we received a deficiency letter from the Listing Qualifications Department of Nasdaq, or the Staff, notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on Nasdaq.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we have been provided a period of 180 calendar days, or until December 26, 2022, in which to regain compliance. In order to regain compliance with the minimum bid price requirement, the closing bid price of our common stock must be at least $1.00 per share for a minimum of ten consecutive business days during this 180-day period. In the event that we do not regain compliance within this 180-day period, we may be eligible to seek an additional compliance period of 180 calendar days if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, with the exception of the bid price requirement. However, if it appears to the Staff that we will not be able to cure the deficiency, Nasdaq will provide notice to us that we will not be eligible for the additional compliance period and our common stock will be subject to delisting. We would then be entitled to appeal the determination to a Nasdaq Listing Qualifications Panel and request a hearing.

There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or maintain compliance with the other Nasdaq listing requirements. If we do not regain compliance with the Nasdaq continuing listing requirements, our common stock will be delisted from Nasdaq and it could be more difficult to buy or sell our securities and to obtain accurate quotations, and the price of our common stock could suffer a material decline. In addition, a delisting would impair our ability to raise capital through the public markets, could deter broker-dealers from making a market in or otherwise seeking or generating interest in our securities and might deter certain institutions and persons from investing in our securities at all.

Item 2. Unregistered sales of equity securities and use of proceeds.

None.

Item 3. Defaults upon senior securities.

None.

Item 4. Mine safety disclosures.

Not applicable.

Item 5. Other information.

None.

Item 6. Exhibits.

(a)

The following exhibits are filed herewith or incorporated by reference herein:

EXHIBIT INDEX


Exhibit No.	Description	Method of filing
10.1	Amendment No. 3 to License and Supply Agreement, dated as of July 1, 2022 by and among Societal CDMO Gainesville LLC and Lannett Company, Inc.	Filed herewith
31.1	Rule 13a-14(a)/15d-14(a) certification of Principal Executive Officer	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) certification of Principal Financial and Accounting Officer	Filed herewith
32.1	Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
101 INS	XBRL Instance Document	Filed herewith
101 SCH	XBRL Taxonomy Extension Schema	Filed herewith
101 CAL	XBRL Taxonomy Extension Calculation Linkbase	Filed herewith
101 DEF	XBRL Taxonomy Extension Definition Linkbase	Filed herewith
101 LAB	XBRL Taxonomy Extension Label Linkbase	Filed herewith
101 PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	SOCIETAL CDMO, INC.

Date: August 10, 2022	By:	/s/ J. David Enloe, Jr.
		J. David Enloe, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: August 10, 2022	By:	/s/ Ryan D. Lake
		Ryan D. Lake
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Societal CDMO (SCTL) 10-Q2022 Q2 Quarterly report

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